A subsidiary of the German financial company Allianz has pleaded guilty to securities fraud after some of its hedge funds collapsed in March 2020 and caused major losses for investors including the Arkansas Teacher Retirement System.
Allianz Global Investors U.S. LLC agreed to pay more than $3 billion in restitution to affected clients as part of a plea deal with federal prosecutors, the Department of Justice announced Tuesday. The company also agreed to a criminal fine of $2.3 billion, and it will forfeit approximately $463 million to the federal government.
An indictment alleges that Gregoire Tournant, the company’s chief investment officer, lied to investors for years about the level of risk associated with the funds. And as costs increased, he and others at Allianz secretly bought cheaper hedges that provided much less protection to investors, according to authorities.
To hide the true riskiness of the investments, Tournant allegedly provided investors with altered documents.
The funds, which were marketed mostly to institutional investors, lost more than $7 billion when the market crashed at the onset of the COVID-19 pandemic. The Arkansas teachers fund lost $774 million. In total, more than 100 institutional investors representing more than 100,000 people were affected.
Prosecutors said no risk or compliance personnel verified, attempted to verify, or were responsible for verifying that Tournant and his colleagues were purchasing hedging positions within the range that was represented to investors.
“As alleged, Gregoire Tournant and his co-conspirators lied to investors and secretly exposed them to substantial risk in order to line their own pockets and those of their employer, AGI,” Damian Williams, U.S. Attorney for the Southern District of New York, said in a news release. “Pension funds for so many retirees, religious organizations, and essential workers — from laborers in Alaska, to teachers in Arkansas, to bus drivers and subway conductors here in New York City — invested with AGI because they were promised a relatively safe investment with strict risk controls. But AGI, the ‘master cop’ that Tournant claimed was watching over his shoulder, making sure that he adhered to his promises, was asleep on the beat.”
The Arkansas Teacher Retirement System sued Allianz for breach of contract, breach of fiduciary duty and negligence. They reached a $642 million settlement in February.
Clint Rhoden, the system’s executive director, said the settlement money is believed to be part of the restitution Allianz has agreed to pay. He said it’s unknown whether the system qualifies for additional restitution but it would be “allowed to participate in future distributions if warranted.”
Tournant, 55, of Basalt, Colorado, is also accused of trying to obstruct a U.S. Securities and Exchange Commission investigation into the losses. He faces charges of securities fraud, conspiracy to commit securities fraud, investment adviser fraud and conspiracy to obstruct justice.
Two others allegedly involved in the scheme have already pleaded guilty and are cooperating with authorities. Portfolio managers Trevor Taylor, 49, of Miami, and Stephen Bond-Nelson, 51, of Berkeley Heights, New Jersey, pleaded guilty to conspiracy, securities fraud and investment adviser fraud.